Claims tide to trigger 10% premium hike for 2010 indemnity renewal, warns broker

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By Legal Futures

17 May 2010


Taking cover: open market cost of insurance to top SIF for first time

A rising tide of claims against solicitors and a huge increase in the number of firms falling into the assigned risks pool (ARP) means law firms should prepare for a 10% jump in professional indemnity premiums this year, broker Lockton has warned.

In its annual review of the solicitors’ indemnity market, Lockton said such an increase would mean that, for the first time since the demise of the Solicitors’ Indemnity Fund 11 years ago, the total amount of premium that solicitors pay for their professional indemnity will have exceeded the peak of contributions to SIF in 1999, when it stood at £256 million.

Concerns over issues such as the unknown exposure to the ARP – which every qualifying insurer has to pay towards in proportion to its market share – and the stringent minimum terms and conditions have led to Hiscox leaving the market for 2010, Lockton said.

From 30 firms in 2007, there were 150 in the ARP in 2008, getting on for 300 this year and “with the current rate of progress this could rise to 500 in 2010”. The huge level of claims generated by firms in the ARP drives up premiums – the firms in the ARP in 2008 are currently estimated to have generated £30-50 million worth of claims.

Steve Holland, executive director of Lockton’s Professions and Risk Solutions practice, said: “2010 is shaping up to be a year of major change in the PI market. The change is being driven by rising claims, diminishing investment returns, insurers exiting the class of business, the impact of Quinn going into administration, and problems associated with the ARP. I hate to be the harbinger of bad news, but all the indications are that PI premiums for law firms will become increasingly expensive and harder to get for some.

“Firms involved in property work are likely to bear the brunt of the rating increases, as will firms that undertake commercial work, whether non-contentious or litigious. In addition, firms with a poor claims history should expect to come under close scrutiny from their insurers. They should be prepared to answer questions on their risk profile, their business processes, and the quality of their lawyers.”

The review explained how, last year, new entrants to the market writing £40 million worth of business (out of a total premium take of £246 million for the first compulsory layer of cover) held rates down for many law firms – the overall premium take rose by under 9%, less than had been predicted. However, Lockton said: “The impact of new entrants is that they have simply deferred the hard market rather than prevented it, and there may be a bigger hike in the future to correct the downward pressure on prices.”

It continued: “The last hard market in 2003 and 2004 followed on from 9/11 and was based on lack of supply and too much demand. The current hard market is more the product of claims activity; this favours some underwriters and not others. The established insurers have a surplus from the last hard market which they can rely on to fund the losses they are now sustaining. New entrants lack these funds and may not make sufficient return from the current premiums to pay the inevitable losses.”

The review said several factors are putting pressure on rates: “Claims are rising and investment returns are diminishing. Notifications on both residential and commercial property work are high, as well as high severity claims arising from company commercial work. The general concern over the economic downturn, increase in loss frequency and the rising incidence of fraud, dishonesty and mortgage claims are all affecting PI and also D&O (directors and officers) liability. There is concern over the potential for aggregation of losses from a single event such as a conveyancing fraud ring.”

Lockton argued that firms will need to consider how much risk they can afford to retain on their balance sheet and predicted that firms will start to manage their insurance costs more actively and larger firms may start to self insure through cell captives.

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